The Jelly Bean Corporation (JBC) has instructed you to estimate its weighted ave

Question

The Jelly Bean Corporation (JBC) has instructed you to estimate its weighted average cost of capital (WACC). You are given the following data JBC of 15-year bonds could be sold at par to yield 8% paid annually (the yield to maturity on the existing debt) with each $1,000 bond incurring before-tax underwriting expenses of $45. New preference shares can be sold at par to provide a dividend yield of 9% with before-tax issuing and underwriting expenses amounting to 7% of par value Ordinary shares can be sold to an underwriting syndicate at $12.60 per share, which represents a 10% discount from the current market price. Before-tax issuing and underwriting expenses would be 6.5% of the issue price Current earnings per share are $1.54, and the stock just paid a dividend of $0.72 per share. Analysts agree that both earnings and dividends will grow at a rate of 6% in the foreseeable future. In addition, the current risk-free rate of return is 4%, the historical market price of risk is 7%, and the beta of JBC ordinary shares is 1.05. JBC must issue new ordinary equity to meet this year's capital expenditure requirements. has a corporate tax rate of 35%. New debt in the form Jelly Bean Corp. has the following balance sheet figures g-term bonds (9% coupon. I 5-year maturity ) S 35,000, shares (,000,000 shares outstanding. S15 par e, I 0% dividend) shares (4,000,000 shares outstanding) camin $ 15,000 S 20,000, S 30,000 Required What is the after-tax cost (in %) and market value of JBC's long-term debt? What is the after-tax cost (in %) and market value of JBC's preference shares? What is the after-tax cost (in %) and market value of JBC's ordinary equity, using the CAPM? Based on the CAPM estimate of the cost of ordinary equity what is JBC's WACC? The assignment should be printed on A4 size sheets on one side only and the student names and IDs must be printed on the first page of the report. 0

Explanation / Answer

After tax cost (in %)and market value of JBC's long term debt Kd= 9-(9*35%) 5.85 % Market value= coupon*(pvaf 9%,15)+35000000(pvif9%,15) Coupon= 3150000 Market value= 34951000 After tax cost (in %)and market value of JBC's prefrence share Kp= 10% Market value= 15000000*10%/9% = 16666667 After tax cost (in %)and market value of JBC's ordinary equity,using capm ke= rf+(rm-rf)beta = 4+(7*1.05) = 11.35 % market value= Current market price= 20.265 market value= 4000000*20.265 = 81060000 WACC kd*weight of debt+kp*weight of pref share+ke*weight of share holding Total= 132677667 = 8.4879471 %

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